April 22, 2010

U.S. Joins H-P Bribery Investigation

The U.S. has joined German and Russian authorities in investigating whether Hewlett-Packard Co. executives paid millions of dollars in bribes to Russian officials to win a contract in Russia, according to people familiar with the matter.

The U.S. Justice Department and Securities and Exchange Commission are investigating whether H-P committed any violations of the Foreign Corrupt Practices Act, these people said, as part of a widening probe into the company’s activities. The law bars American companies from bribing foreign-government officials anywhere in the world.

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While the Justice Department can pursue criminal charges against companies and individuals for FCPA violations, the SEC can levy civil penalties against alleged violators.

An H-P spokeswoman said the company had discussions Thursday with the SEC regarding the German probe “and is fully cooperating with U.S. and German authorities on this matter.”

German prosecutors have centered their inquiry into the suspected bribes on one current and two former senior executives of the U.S. computer maker, according to German court records and people familiar with the probe. Those under investigation include a former head of H-P’s sales operations in Russia and the former Soviet Union.

German prosecutors are investigating whether H-P executives paid €8 million ($10.9 million) in bribes, via a complex network, to win a €35 million Russian contract. See chart

German authorities ordered the arrest of the three in early December on suspicion of bribing foreign officials, tax evasion and breach of trust, according to court records. All have since been released on bail, and haven’t been indicted. A prosecution spokesman said they remain suspects, but that investigators haven’t found any evidence that they enriched themselves.

The inquiry, the most significant probe in years of possible bribery involving a U.S. company in Russia, comes as H-P has been trying to repair its image in the wake of a 2006 boardroom spying scandal that sparked criminal prosecutions, civil lawsuits and the resignation of the company’s chairwoman.

Russian investigators raided H-P’s Moscow offices Wednesday in connection with the German bribery probe, which court records show has been under way for two years.

German prosecutors are looking into whether H-P executives paid about €8 million ($10.9 million) in bribes to win a €35 million contract to supply computer equipment throughout Russia to the country’s prosecutor general, the federal authority responsible for handling criminal cases.

German prosecutors are investigating whether H-P executives devised a plan to send funds to Russia through a complex network involving German middlemen, shell companies spread from Wyoming to New Zealand, and a Moscow computer supplier, according to German court records and people close to the investigation.

The prosecutors say they are looking into whether a German H-P subsidiary called Hewlett-Packard International Sales Europe GmbH, after receiving a €35 million payment for the Russian contract, sent about €8 million in suspected bribes back to unidentified officials in Russia. Prosecutors suspect that money was funneled through three German middlemen, all independent sellers of H-P equipment based in eastern Germany.

The three suspected middlemen allegedly received fake invoices from shell companies representing unidentified parties through a Moscow-based computer supplier.

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Using funds provided by H-P, the three middlemen are alleged to have paid the invoices—for equipment they never purchased—to shell companies with bank accounts in Latvia, Lithuania, Austria, Switzerland and Belize. German prosecutors haven’t identified the ultimate beneficiaries of the shell companies. In return, the suspected middlemen allegedly received commissions totaling several hundred thousand dollars, according to court documents. There are no indications that the H-P executives or the intermediaries tried to use the funds for their own benefit.

Authorities say they are still trying to determine the ultimate recipients of the payments, which court records show were sent between 2004 and 2006. The records appear to contradict a statement made by an H-P spokesman Wednesday that the German investigation involves “alleged conduct that occurred almost seven years ago.” H-P said it stands by that statement.

The three H-P employees under investigation, according to German court records, are: Hilmar Lorenz, the former head of HP sales in Russia and the former Soviet Union; Kenneth Willett, who led a Germany-based H-P unit that dealt with equipment sales throughout Europe, the Middle East and Africa from 2003 until it was disbanded in 2007; and Paeivi Tiippana, who preceded Mr. Willett as head of the German unit.

Mr. Willett, an American, currently works for H-P as a senior marketing executive in Germany, but H-P said he is on administrative leave. He was released from a German jail on Jan. 6 after posting €250,000 bail. Through his lawyer, Mr. Willett said he did nothing wrong.

Mr. Lorenz, who arranged the Russian deal at the center of the probe for H-P in 2003, was arrested on Dec. 2 on suspicion of bribing foreign officials and related crimes, according to the records. After spending nearly four months in jail, Mr. Lorenz was released on March 25 after agreeing to talk to prosecutors and posting a bond of €160,000, according to court documents.

Mr. Lorenz worked for H-P at least until the end of 2007, according to court records. He now runs a consulting business from his home outside Berlin. He didn’t respond to requests for comment. On Thursday, a man who answered the door at his home declined to comment. A lawyer for Mr. Lorenz also declined to comment.

Ms. Tiippana, a Finnish national who lives near Zurich, didn’t respond to a written request for comment that was forwarded to her lawyer. Ms. Tiippana, who was arrested in Switzerland, was released from jail on Dec. 30 after about four weeks in detention, according to the court records.

German authorities are looking into whether Mr. Lorenz conceived the alleged plan to divert bribes through shell companies, court records show. For the better part of a decade, Mr. Lorenz was a key H-P representative in Russia and the former Soviet Union, securing millions of dollars in contracts for the company, according to news accounts from that period.

Mr. Lorenz was often joined by senior government officials in announcing the deals, according to Russian news reports between 1999 and December 2007. In November 1999, Mr. Lorenz joined Russian leader Vladimir Putin at the opening of a supercomputer center in Moscow, the Russian media reported at the time.

The prosecution spokesman, Wolfgang Klein, said the investigation was started in 2007 when a tax auditor discovered bank records showing that between 2004 and 2006, the H-P subsidiary paid €22 million into the account of ProSoft Krippner GmbH, a small computer-hardware company in Leipzig. The records indicated the payment was made for services performed in Moscow, according to Mr. Klein.

Mr. Klein said the size of the payment to ProSoft Krippner caught the tax auditor’s attention, and that he flagged the transfer to a special prosecution team in Dresden that handles major corruption cases.

ProSoft Krippner Chief Executive Ralf Krippner, who is also a member of the local parliament in the German district of North Saxony, declined to comment. He referred questions to his lawyer, who also declined to comment. Prosecutors confirmed Mr. Krippner is a suspect in the probe, but he hasn’t been indicted.

Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview that he was surprised when, as a temporary employee of H-P, he first saw an invoice from ProSoft Krippner in 2004. “It didn’t make sense,” because there was no apparent reason for H-P to pay such big sums to accounts controlled by small-business men, Mr. Brunner said.

Mr. Brunner said he processed the transactions anyway because he was the most junior employee handling the file. “I assumed the deal was OK, because senior officials also signed off on the paperwork,” he said.

H-P declined to comment.

Mr. Brunner isn’t a suspect in the case, according to the prosecution spokesman.